RHL Properties & Development Corp.

January 22, 2009 BIR RULING [DA-(VAT-010) 032-09] 106 (A); RR 12-2001; #322-88 RHL Properties & Development Corp. 8/F, Times Plaza Building U.N. Avenue Cor. Taft Avenue Ermita, Manila Attention: Ms. Loreta G. Carlos Operations Manager/Comptroller Gentlemen : This refers to your letter dated December 18, 2008 requesting for confirmation of your opinion that the sale by RHL Properties and Development Corp. ("RHL") for brevity) of leasehold rights is subject to 12% VAT and 6% creditable withholding tax. It is represented that RHL is a 100% Filipino corporation duly organized and existing under the laws of the Republic of the Philippines. It was incorporated on March 8, 1995, primarily to engage in the business of real estate development and leasing. RHL entered into a contract with Harris Memorial College Development Center for Women, Inc. (Harris) for a 50 year lease of a property located in Manila. The lease will end on November 2, 2045. RHL constructed a Twenty One (21) storey commercial and office building on the said property. In one of its transactions, RHL is entering into a sales contract selling 1,191.04 square meter of office space. However, the building that RHL constructed is not a condominium, hence, the salable office spaces are not covered by Condominium Certificates of Title (CTC). The sale of office space transfer the ownership of right for the use of that building portion including the right to lease to a third party subject only to the rules and regulations of the building association and to sell that space to another party. The usage and/or ownership of that space shall also terminate at the end of RHL 50 year lease. In lieu of the CCT, RHL shall issue to the buyer Certificate of Ownership to evidence ownership. In reply, please be informed that a value-added tax equivalent to twelve (12%) percent shall be levied, assessed and collected on every sale, barter or exchange of goods or properties. The term 'goods' or 'properties' refer to all tangible and intangible objects which are capable of pecuniary estimation which shall include real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business. (Section 106 (A) of the 1997 Tax Code, as amended by Republic Act No. 9337). Real estate dealer as defined under Revenue Regulations (RR) No. 4-2007 includes any person engaged in the business of buying, developing, selling, exchanging real properties as principal and holding himself out as a full or part-time dealer in real estate. IHEAcC Being a corporation primarily engaged in the business of real estate development and leasing, the sale of RHL of its right to use an office space shall be subject to 12% VAT. On the other hand, Section 2.57.2 (J) (B) of RR 6-2001, as amended, provides that a creditable withholding tax based on the gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale of the property which is an ordinary asset of the seller shall be imposed upon the withholding agent/buyer in accordance with the rates ranging from 1.5%, 3% and 5%. The said sale of leasehold right made by a real estate dealer, such as RHL, is subject to the creditable withholding tax for being a sale of an ordinary asset made by a real estate dealer. Thus, the sale of the right to use a real property which is an ordinary asset of RHL, a real estate dealer, shall be subject to the creditable withholding under RR 6-2001, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service